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BUY Petronet LNG - Upgrading EPS, target, reco; target Rs135
With domestic gas production continuing to struggle, imported LNG will remain a
key source of incremental supply in India. This is reflected in recent medium term
contracts of Gail and PLNG as well as continued spot cargoes translating to greater
medium term volume visibility for PLNG. Poor gas availability also improves PLNG’s
pricing power helping it ward off immediate pressures on its regas tariff. We are
upgrading FY12-14 EPS by 12-26% to factor in higher volumes and regas tariffs.
We are also upgrading our target to Rs135/sh (+14%) and our reco to O-PF.
Domestic gas production plateau. With Reliance’s KG-D6 gas production struggling
and output from other sources (ONGC, GSPC, CBM) years away, India’s domestic gas
production would plateau at ~135mmscmd near term. With demand at +225mmscmd,
imported LNG will remain a relevant supply source for the medium term. This bodes
well for PLNG (10mt capacity) where volumes rose to 34mmscmd (9.4mt) in 2HFY11.
Medium term contracts. We anticipate LNG imports to continue to rise, therefore, to
cater to latent demand. This is reflected in recent contracts too with Gail signing a
three year 0.5mtpa contract with Marubeni and PLNG creating a 1.1mtpa two year
import portfolio. GSPC also imports ~0.5mt, Gail sources additional spot cargoes while
PLNG may also import 4-5 more cargoes in 2011 in addition to its 1.1mt contract.
Higher visibility on volumes. These additional imports bode well for medium term
visibility for the Dahej terminal; we expect FY12 imports at 10.2mt. Further contracts,
from Qatar (0.3-2mtpa) or GDF (0.4mtpa as has been speculated) or for Pragati Power
(0.9mtpa of volumes) and for ONGC’s C2-C3 unit (~1mtpa) will also be supportive.
Spot cargoes (~0.5mt in FY11) should have risen smartly too but may be moderated
given the headwind of rising LNG prices on the back of higher demand from Japan.
Lower pressure on re-gas tariffs. Plateuing local supply will also helps PLNG retain
pricing power and allow it offset any immediate pressure on re-gas tariffs. We now
model 5% escalations in 2012-13, therefore (10% cut in 2012 earlier) but model 10%
cut in 2014 to factor in the renewed pressures by 2H-2013 when PLNG’s expanded
capacity at Dahej (second jetty, +3mtpa) and at Kochi (+5mtpa) come onstream and
the outlook for Reliance’s gas production improves again. We note, though, that PLNG
has contractual agreements for a 5% annual escalation in regas tariffs till 2029.
Upgrading EPS, target and recommendation. We are upgrading FY12-14 EPS
estimates by 12-26% to factor in higher re-gas tariffs and volumes. We do not model
trading margins on PLNG’s short term and spot cargoes but it has historically earned
US¢25/mmbtu+ here; this can increase EPS by ~8%. We are upgrading our risked DCF
based 12m target to Rs135/sh (+14%) and our rec to O-PF. Earnings based valuations
(13x Mar12 PE) are also reasonable given the buoyant medium term outlook. A cut in
Dahej re-gas tariffs (5ppt = 10% on EPS) and any decisions that impair Kochi
economics (we model ~16% equity IRRs, value it at 1.9x PB or Rs15/sh) are key risks.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
BUY Petronet LNG - Upgrading EPS, target, reco; target Rs135
With domestic gas production continuing to struggle, imported LNG will remain a
key source of incremental supply in India. This is reflected in recent medium term
contracts of Gail and PLNG as well as continued spot cargoes translating to greater
medium term volume visibility for PLNG. Poor gas availability also improves PLNG’s
pricing power helping it ward off immediate pressures on its regas tariff. We are
upgrading FY12-14 EPS by 12-26% to factor in higher volumes and regas tariffs.
We are also upgrading our target to Rs135/sh (+14%) and our reco to O-PF.
Domestic gas production plateau. With Reliance’s KG-D6 gas production struggling
and output from other sources (ONGC, GSPC, CBM) years away, India’s domestic gas
production would plateau at ~135mmscmd near term. With demand at +225mmscmd,
imported LNG will remain a relevant supply source for the medium term. This bodes
well for PLNG (10mt capacity) where volumes rose to 34mmscmd (9.4mt) in 2HFY11.
Medium term contracts. We anticipate LNG imports to continue to rise, therefore, to
cater to latent demand. This is reflected in recent contracts too with Gail signing a
three year 0.5mtpa contract with Marubeni and PLNG creating a 1.1mtpa two year
import portfolio. GSPC also imports ~0.5mt, Gail sources additional spot cargoes while
PLNG may also import 4-5 more cargoes in 2011 in addition to its 1.1mt contract.
Higher visibility on volumes. These additional imports bode well for medium term
visibility for the Dahej terminal; we expect FY12 imports at 10.2mt. Further contracts,
from Qatar (0.3-2mtpa) or GDF (0.4mtpa as has been speculated) or for Pragati Power
(0.9mtpa of volumes) and for ONGC’s C2-C3 unit (~1mtpa) will also be supportive.
Spot cargoes (~0.5mt in FY11) should have risen smartly too but may be moderated
given the headwind of rising LNG prices on the back of higher demand from Japan.
Lower pressure on re-gas tariffs. Plateuing local supply will also helps PLNG retain
pricing power and allow it offset any immediate pressure on re-gas tariffs. We now
model 5% escalations in 2012-13, therefore (10% cut in 2012 earlier) but model 10%
cut in 2014 to factor in the renewed pressures by 2H-2013 when PLNG’s expanded
capacity at Dahej (second jetty, +3mtpa) and at Kochi (+5mtpa) come onstream and
the outlook for Reliance’s gas production improves again. We note, though, that PLNG
has contractual agreements for a 5% annual escalation in regas tariffs till 2029.
Upgrading EPS, target and recommendation. We are upgrading FY12-14 EPS
estimates by 12-26% to factor in higher re-gas tariffs and volumes. We do not model
trading margins on PLNG’s short term and spot cargoes but it has historically earned
US¢25/mmbtu+ here; this can increase EPS by ~8%. We are upgrading our risked DCF
based 12m target to Rs135/sh (+14%) and our rec to O-PF. Earnings based valuations
(13x Mar12 PE) are also reasonable given the buoyant medium term outlook. A cut in
Dahej re-gas tariffs (5ppt = 10% on EPS) and any decisions that impair Kochi
economics (we model ~16% equity IRRs, value it at 1.9x PB or Rs15/sh) are key risks.
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